Following the government’s white paper, regulators including the Financial Conduct Authority (FCA), the Bank of England and the Prudential Regulation Authority (PRA) each confirmed a principles-based approach for the UK financial sector in relation to AI, suggesting that regulated entities are unlikely to be bound by prescriptive rules governing the use of AI in the near-term.
On 29 March the UK government launched a “pro-innovation” white paper intended to “turbocharge” economic growth through a clear and “proportionate” regulatory approach that allows AI to flourish.
“Instead of creating cumbersome rules applying to all AI technologies, our framework ensures that regulatory measures are proportionate to context and outcomes, by focusing on the use of AI rather than the technology itself,” said the paper, which also stressed the importance of close international cooperation.
READ MORE: Talent, collaboration, ethics – Secret sauce for genAI in derivatives
The government has engaged extensively in industry debate around the application of AI in all areas, and as part of its consultation response, called upon regulators in key sectors to outline their strategic approach by the end of April 2024, including an explanation of their current AI framework and any plans they have to ensure the correct structures are in place going forward to manage and regulate its use.
In response, the FCA last week published an AI update outlining its approach.
“Financial services are already at the forefront of digitisation and AI could significantly
transform the way these firms serve their customers and clients – in both retail and wholesale financial markets,” said chief data, information and intelligence officer Jessica Rusu, who stressed that: “The FCA is a technology-agnostic, principles-based and outcomes-focused regulator.” A variety of TechSprints, regulatory sandboxes and other FCA innovation services have already been implemented to prove access to a suite of tools to collaborate and develop proof of concepts, including providing access to high-quality synthetic data.
“Data and digital plays a key role in the FCA strategy,” added Rusu. This includes
a new FCA digital hub in Leeds, while the regulator has also recently recruited over 75 data scientists. “We are exploring how we can use AI in the pursuit of our objectives. It has already transformed the speed with which we can monitor and tackle scam websites, money laundering and sanctions breaches, as well as supporting the work of the Supervision Hub,” said Rusu.
DON’T FORGET TO TAKE PART IN THE GLOBAL TRADING AI SURVEY
In the same week, the Bank of England and the Prudential Regulation Authority (PRA) also published a letter addressed to the secretary of state for science, innovation and technology, Michelle Donelan MP; and the economic secretary to the treasury and city minister, Bim Afolami MP, setting out their own approach to AI in the financial markets.
“AI/ML are rapidly developing technologies with the potential to enhance the financial services sector in the UK and globally,” emphasised the letter, adding that both authorities have spent the past few years working on a plan to safely adopt and regulate these new tools.
“AI/ML is already being widely adopted in many parts of the financial sector to improve firms’ operational efficiency, better detect fraud and money laundering, and enhance data and analytics capabilities,” confirmed the letter. “We have engaged extensively – and will continue to do so – with the tech sector, academia, and financial services firms to keep up with the rapid pace of technological change.”
Both the Bank of England and the PRA stressed that their focus is to understand how to support the safe and responsible adoption of AI/ML in financial services from both a macro-financial and prudential perspective, given the potential benefits – including driving innovation – that AI/ML could bring to firms.
“Our core principles, rules, and regulations do not usually mandate or prohibit specific technologies,” they said. “However, technology-agnostic does not mean technology-blind.”
All three UK regulators have been exploring the implications of the use of AI in financial services for several years now: including an initial Bank of England paper on better understanding the adoption and use of ML in financial services published in 2019, with a follow-up in 2022. From 2020 to 2022, the Bank and the FCA ran the AI Public-Private Forum (AIPPF) examining the challenges of using AI/ML within financial services, as well as opening a dialogue between the public and private sectors on the topic. In 2022, the Bank, PRA, and FCA published a further paper seeking views on whether the existing regulatory framework was sufficient to address the risks and harms associated with AI, while in October 2023 the Bank published another feedback statement summarising respondents’ views to its discussion paper.
In December 2023 the UK’s Financial Policy Committee (FPC) was briefed on the continued adoption of AI/ML in financial services and the potential financial stability implications, and committed to considering these potential risks in 2024. The Bank is also about to launch the third instalment of its ‘ML in UK financial services’ survey, and will work with the Digital Regulation Cooperation Forum (DRCF) on selected AI/ML projects – for example, conducting joint research to better understand cross-sector adoption of generative AI technology.
“Given the rapid pace of innovation and widespread use cases, we are also undertaking deeper analysis on the potential financial stability implications of AI/ML over the course of this year,” said the deputy governors Sam Woods and Sarah Breeden.
“Both the FCA and BoE/PRA Updates indicate that they welcome the government’s principles-based, technology-agnostic and sector-led approach to regulating AI,” commented law firm Hogan Lovells. “Many businesses that operate in the financial sector – including financial services firms and technology providers – will welcome the principles-based approach favoured by the regulators and will be happy that they will not need to prepare for a prescriptive new suite of regulations in relation to IT systems that rely on AI components.”
© Markets Media 2024.
